Education Accounts

A Coverdell Education Savings Account (ESA) is a tax-free trust account designed to help families pay for educational expenses. Money invested into the account grows tax-free. Money withdrawn is also tax-free when used for flexible qualified expenses.

A Coverdell ESA is a common college savings account where your money grows tax-free. But unlike other options, such as a 529 Plan, you can only contribute up to $2,000 a year depending on your income. The biggest difference is that the funds can be withdrawn to pay for almost any education expense, not just college tuition.

• Private school tuition
• Tutoring
• Homeschooling supplies
• Special needs services and educational therapy services
• Books, curriculum materials and supplies required for attendance
• Computers, equipment and other technology required upon enrollment

Open an account for any beneficiary under the age of 18 for as little as $5. Contribute up to $2,000 per year, per account. The earnings on your contributions grow tax-free at a fixed rate of .50% APY. When it comes time to use the funds, the beneficiary can do so without paying any additional taxes. (The beneficiary must use the funds before turning 30).

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You don’t have to pay taxes on investment income or capital gains on the account, which means your money can compound faster. Withdrawals are free from federal taxes as long as the money is used for qualified education expenses.

• The contribution maximum for Coverdell ESAs is only $2,000 a year per student.
• While the investment income gained from the account is tax-free, your contributions toward the Coverdell ESA aren’t tax deductible.
• Using the funds for nonqualified distributions is taxable and will receive a 10% penalty.
• You can only contribute to the account until your child reaches the age of 18 and the funds must be dispersed before the beneficiary turns 30.

The account can be opened by a parent or guardian, and contributions can come from parents, grandparents, relatives, friends, or family members. The contributor’s adjusted gross income must be under the limit set for a given tax year to be eligible* – talk to us for details on the current year’s limits.

If the funds aren’t used by the time the beneficiary turns 30, the remaining funds must be distributed. If the distribution doesn’t qualify as an educational expense, the taxes and 10% penalty would apply. However, you can change the beneficiary of the account, without penalty, to other family members under the age of 30.

Depending on your financial situation, a Coverdell ESA could be a great fit for your family. For those looking to save up to $2,000 a year toward a flexible tax-deferred education savings plan, our Coverdell ESA might make sense. If you need advice on financial planning, consult a tax professional or schedule an appointment with a FECA Financial Advisor.

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*As with any investment that will affect your taxes, and to find out if you are eligible to contribute, consult your professional tax advisor.